On 17 April, the FCA released its Business Plan for 2019/20, in which it sets out its key priorities for regulating the financial services industry over the next 12 months.
Consistent with the SMCR (which will be extended to all regulated firms this year), there is a continued focus on culture and governance of the firms the FCA regulates.
There is a focus on promoting healthy cultures where the driving purpose leads people to take personal responsibility for consumer and market outcomes, to do the right thing competently and to speak up and listen to others.
"Firms’ culture and governance" is one of the FCA’s seven cross-sector priorities for 2019/20. The areas of focus included in the Business Plan include:
- supporting culture transformation within financial services
- exploring the role of ‘purpose’ in culture
- appraisal of renumeration practices
- extending the Senior Managers and Certification Regime to all firms, and
- implementation of the Directory.
The FCA recognises that “firms and individuals must make situational, time-critical business decisions” and that “market practice can evolve more quickly than regulatory requirements”. In this year’s report, the FCA also highlights that ”a healthy culture … helps individuals to make the right judgements that do not result in consumer or market harm” and that “conversely, weak governance or poor culture increase the likelihood that harm will occur.”
The FCA’s key priorities for firms’ culture and governance include:
- working with firms to promote and embed healthy culture, focusing on four drivers of behaviour: purpose, leadership, reward and managing people, and governance
- reviewing firms’ remuneration arrangements to identify if they are encouraging staff to act in ways that could harm consumers or markets, and
- expanding the Senior Managers and Certification Regime (SM&CR) to all FCA-authorised firms, and holding individuals to account under SM&CR when things go wrong.
Firms’ culture and governance: the FCA’s specific activities
Supporting culture transformation in financial services
the FCA is working with firms and the academic community to better understand what makes a healthy culture by exploring key topics in greater depth, and
in March 2020, the FCA will hold a second Transforming Culture conference to share and discuss the outputs from this work.
Exploring the role of ‘purpose’ in creating healthy cultures
- a more in depth look at the concept of ‘purpose’ in financial services and the case for creating purposeful cultures. The FCA will look to assemble and review the evidence for causal linkage between healthy cultures and business models and healthy outcomes for consumers, markets, and firms
- it will set up a working group with members from different disciplines, host industry roundtables and publish the conclusions, and
- membership of the working group will be drawn from the FCA’s Practitioner Panel, industry professional bodies and select academics of its own choosing.
Evaluating firms’ remuneration practices
- the FCA will review firms’ remuneration and recognition practices to ensure that approaches to rewarding and incentivising all staff to reinforce healthy cultures and do not drive behaviours that would lead to harm to consumers or markets, and
- the FCA wants to undertake a broader examination of the role that bonuses play in driving behaviours and other non-financial motivating factors.
Extending the SM&CR to all FCA-authorised firms
the SM&CR will be extended to all authorised firms in December 2019
the FCA intends that this will embed consistent standards of personal conduct for all individuals working in financial services and highlight the individual accountability of senior managers so that consumers are treated fairly and market integrity is enhanced, and
the FCA will work with firms and trade associations to ensure that the regime is implemented effectively and firms and individuals understand what they need to do.
Establishing the Directory
in March 2019, the FCA published final rules establishing the Directory - a “user-friendly, public source of information about individuals in key roles who will not be included on the Register as senior managers as part of the SM&CR”, and
the Directory is due to go live in March 2020 for banks and insurers, and December 2020 for all other FSMA firms.
To monitor change in the area of culture and governance in 2019/20, the FCA will review levels of engagement with specific pieces of work, for example, webinars and culture sprints. Through its supervision of individual firms, it will reach a judgment on the effectiveness of a firm’s culture which may reduce the potential for harm. The FCA will also track engagement by firms preparing for the introduction of the SM&CR in December 2019, and will monitor the embedding of SM&CR in new firms.
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